EDITORIAL: Onerous tax code behind corporate flight

Post date:

Thu, 09/25/2014 - 5:56am

It’s not corporate greed or a lack of patriotism that is driving American corporations overseas, as President Barack Obama contends. It’s one of the worst corporate tax codes in the developed world. The cold, hard evidence of that is detailed in a new study ranking the tax competitiveness of 34 industrialized nations.

The United States ranks 32nd, ahead of just Portugal and France, according to the Tax Foundation, a free market institute. It measured nations on 40 variables, including corporate and individual income taxes, sales taxes, property and estate taxes and international tax rules.

That the country that taught the world the principles of capitalism and free markets now ranks so poorly should shame American policymakers. Instead, the president and Senate Democrats want to heap additional, punitive taxes on corporations that move their legal domicile overseas to avoid already confiscatory rates in the U.S.

Estonia, a former Soviet satellite, is new to the free marketplace. And yet it ranks first in tax competitiveness because, the study says, it has a relatively low 21 percent corporate tax rate, no double taxation on dividend income, a nearly flat 21 percent income tax rate and property taxes only on land, not on buildings and other structures.

Compare that to the United States, which has the highest corporate tax rate in the developed world at 39 percent and is one of only six industrialized nations that taxes the overseas earnings of corporations. The U.S. is also dinged for its estate tax and chaotic state and local property tax policies.

The study faults the high U.S. top marginal income tax rate and a double taxation on capital gains and dividend income.

Those all are things that can be fixed with the sort of smart tax reform proposed by Michigan’s Rep. Dave Camp, R-Midland, who is retiring.

Other nations have proved they can change their rankings in a hurry if they adopt the right reforms.

New Zealand, for example, was far down the competitiveness list in 2010. But it lowered its corporate tax rate, cut top marginal income tax rates and shifted a greater portion of its tax burden to a goods and service tax. This year, it ranked No. 2 on the list.

By comparison, the last major change to the U.S. tax code was 28 years ago, when Congress and President Ronald Reagan dropped corporate income taxes to 34 percent from 46 percent.

Since then, most other nations have leap-frogged the U.S. in making their tax climate more attractive to business. The average corporate tax rate among industrialized countries is now 25 percent, down from 47.5 percent in the 1980s.

The Tax Foundation gives considerable weight to the neutrality of the tax code, meaning policies that seek to raise the most revenue with the fewest loopholes, credits and tax breaks, and without favoring consumption over saving.

Tax competitiveness is a good indicator of economic competitiveness, and thus growth. The U.S. recovery has been sluggish, in no small part because of tax and regulatory policies that dampen growth.

Rather than concocting a tax scheme to hold corporations hostage, the president should be crafting reforms to make them flock here.